This is an age-old question for new franchise systems. Should I hire a full-time salesperson, should I hire a franchise broker or should I sell my franchises myself?

In our experience, in the first year of the life of a new franchisor, there is nobody better to sell the franchise than the founder of the company. There are lead-generation firms that can help you generate leads, but most start-up franchisors have a pipeline of people who have asked them about franchising. You know your business better than anyone else, and you are the best one to explain that business to prospective franchisees, and just as importantly, determine whether the prospect is likely to follow your system and be successful in the business.

It is critical to a startup franchisor that its first franchisees are successful as they serve as your references, good or bad, to future franchise prospects. You also have to work with the people to whom you sell your franchise on a regular basis, and you will likely be more selective than a commissioned salesperson. If selling franchises is not your forte, see if there are others among your existing staff who have the skills to either make the initial offering, bringing you in to close the sale, or to close the sale after you have explained the opportunity to prospective franchisees.

Selling franchises takes time. It involves sorting through leads who have no financial wherewithal to start a business and people who seem to be “professional shoppers” and not “buyers.” It will take you away from your existing business. It is not something the founder or entrepreneur should be doing forever, but, it is our experience in the early stages of the life of a franchise company, that the founders must be involved in the sale of franchises as they are the ones who have to live with the results of these efforts.

There are a lot of mistakes one can make when initially franchising a business, from trying to copy documents used by others (that may not work for you at all), to not being prepared to offer proper support to franchisees. However, the biggest mistake a start-up franchisor can make is in its initial selection of franchisees. Particularly when the franchisor is strapped for cash, it is too easy to use the “mirror test” in selecting franchisees – if they have the money, and can fog the mirror, you take them.

It is critical that your first franchisees reflect the type of franchisee you want in your system. Are they prepared to follow the system? Do they have the proper skill set to be successful in the business, whether that means a cheerful personality, a true passion for your brand, or technical skills required for the business? (The best answer is “all of these.”) Do they have the time and resources to devote to the business?

When you get beyond your first year in franchising, you will be listing your initial franchisees in your franchise disclosure document. If you want to show prospects the kind of money they can make in the business, you will also need to use results from your early franchisees. If these early franchisees are not successful, they will not validate your system and it will be very difficult to overcome these failures. Perhaps even worse, if they are litigious, you will spend the next few years with lawyers and in courtrooms, an expensive and time consuming proposition, rather than growing your business. For these reasons, it is critical that you do your due diligence on prospective franchisees and satisfy yourself not just that they have an interest in your brand, or can “fog the mirror,” but that they will be a “fit” for your system and likely be successful.

Running a franchise company is a completely different business than selling products or services directly to consumers.  As a franchisor, you sell the right to use your brand and system (i.e., the franchise) to franchisees who in turn sell products or services to consumers using your brand and system.  Many new franchisors are caught of guard by the change in business model once they take the leap to franchising.  As a successful franchisor, you have to balance the growth of the brand and the overall health of the franchise system with the needs and wants of franchisees—sometimes your objectives and franchisees’ objectives are aligned, and sometimes they are not.  The franchisors that survive and continue to expand are those that understand how to run a franchise system.

You will find a lot of guidance on running a franchise system as a franchisor on this blog and elsewhere on the Internet, as well as through industry associations, including the American Bar Association’s Forum on Franchising and the International Franchise Association.  We would also recommend that startup and emerging franchisors read a new book, Franchise Management For Dummies, co-authored by Michael H. Seid and Joyce Mazero.  Although the book focuses on both franchisors and franchisees, it discusses creating marketing plans and branding and the secrets to continued success and future expansion.

The co-authors answered some questions regarding Franchise Management For Dummies in a Q&A published in Franchising World, a publication of the International Franchise Association.  Mr. Seid made a key observation for any entrepreneur looking to franchise his or her business:

Most important for prospective franchisors is to understand that there are consultants and lawyers that we call franchise packagers. They offer cookie-cutter services — and that is a serious problem. Pick your advisors carefully and talk to their clients to understand their reputations.

Q&A with the Authors of Franchise Management For Dummies, June 05, 2017, Robert Cresanti, International Franchise Association.

In a previous blog post, I talked about picking between a franchise law firm and a consultant.  As noted in Franchise Management For Dummies and on this blog, the franchise relationship between a franchisor and a franchisee is both a business and a legal relationship.  Franchising is governed by complex state and federal laws regarding the offering and selling of franchises and the ongoing relationship with franchisees, including renewal and termination.  Franchise law firms such as Larkin Hoffman are subject to ethical rules which require us to advice clients based on their best interests.  Consultants, while they may be engaging in the unauthorized practice of law, are not subject to these same ethical rules.  The Larkin Hoffman Franchise Team will not recommend franchising a business if we feel that franchising is not the best growth strategy or that the business is not ripe for franchising.

Mr. Seid continues in his Q&A noting that even among franchise law firms, not all franchise law firms are created equal.  Franchising is a niche area of law.  When choosing a franchise law firm, review the credentials and experience of the franchise lawyers and do your research on the reputation and work product of the law firm.  You may want to talk to current clients of the law firm on their experience working with that law firm.

Picking the right partner in structuring your franchise system at the onset is important to ensure your franchise system starts on the right path.  Remember, you will be signing 5 to 20 year franchise agreements with franchisees, so the terms you set in the beginning will govern the franchise relationship between you and your franchisees for the duration of the franchise term.  Choose wisely.

 

The start of the new year marks the start of franchise renewals for franchisors.  Franchisors are required to annually update their Franchise Disclosure Document and, in the 14 registration states, annually file and register the franchise offering with the state, before they can offer or sell franchises.  For franchisors with fiscal year ends of December 31st, federal and state laws require the Franchise Disclosure Document be updated and filed (in the states that require filings) typically 120 days of the end of fiscal year end.  Some states may require an earlier filing.  However, if you do not update and file (where required) the Franchise Disclosure Document within 90 days of the end of the fiscal year end, some of the franchise registration states will require the franchisor to include updated, interim financial statements with the annual report.

The Larkin Hoffman Franchise Team is gearing up to prepare updated Franchise Disclosure Documents for franchisors nationwide.  As you start preparing for your franchise renewals, here are our top 10 franchise renewal tips for 2017:

  1. Start Now: It may seem obvious, but start working on your Franchise Disclosure Document updates now while there is still ample time and opportunity.  If you wait until spring, you may have to drop everything to get your updates done on time.  Plus, starting early allows you to plan around company or industry conventions, special events, and any other business plans you or your team may have.  Starting now will also give you time to track down information from other personnel in your company, which will be required to prepare the updated Franchise Disclosure Document.
  2. New Franchisee Programs: You should consider any new programs your company may offer franchisees starting in the next year, such as incentive programs and reimaging and remodeling programs for outlets, so they can be described in the Franchise Disclosure Document and incorporated in franchise agreements or through addenda to franchise agreements.
  3. Gather Ideas From the Year: Gather your ideas from experiences of the past year.  What worked and what didn’t work last year?  Your legal staff may have run into issues with the franchise agreement, or perhaps your salespeople identified provisions they would like to change or that could increase the sales of franchises.  Also ask your attorney about any changes in the law and industry best practices.
  4. Crunch the Numbers: Review the financial condition of the company and, if applicable, any parents that are guaranteeing its performance. Ask your attorney how your financial situation will affect the availability of exemptions based on net worth, or any financial assurance conditions that might be imposed by a state, like escrows or fee deferrals. Finally, start looking at how last year’s performance by your units will affect your Item 19 disclosure.
  5. Run the Reports: Much of the year-end information required in the Franchise Disclosure Document, particularly Item 20 and the franchisee lists, is easier to capture now than months after the fact.  By preparing that data now, you can resolve any issues or discrepancies while 2016 is still fresh in mind.
  6. Be First in Line: State examiners receive hundreds of renewal applications in late March. Why not file sooner and get your Franchise Disclosure Document on the top of the stack?  By renewing even a few days early, your review time may be reduced by several weeks, meaning you can get back to selling franchises faster.
  7. Call Your Auditor: If you have not already done so, get in touch with your accountant to ensure your audit is prepared on time (or early – see #6 above).
  8. Update Marketing Materials: Renewal season is a great time to update outdated marketing materials (or prepare new ads) and file the advertising with the states. It is also a good time to give your website a thorough check-up.  Do not let a state examiner review your online content before you do!
  9. Set Your Sales: Coordinate your target filing date with your sales staff so that transactions can be closed in advance of any “dark” period you might experience while waiting for a state to approve your Franchise Disclosure Document.
  10. E-Filing: A few states (Minnesota, Rhode Island, Washington, and Wisconsin) offer the option to e-file certain types of franchise filings. Though each state’s e-file application varies and there are certain limitations, over time e-filing should reduce costs, reduce state review time, and “green up” the renewal process.

Contact your franchise attorney or the Larkin Hoffman Franchise Team to prepare your annual renewal for 2017.